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Structural change and inequality

One important indicator of the effectiveness of economic policy is the manner in which it alters the basic socioeconomic structure of a country. Some 20 years after many of the economies of the world changed track — moving away from an active economic role for states towards liberalisation and globalisation — there is evidence that economic growth, on its own, does not reduce poverty or inequalities. This is clear from a report by the United Nations Research Institute for Social Development (UNRISD). A basic attribute of economic growth is the movement of labour force, typically, from the primary sector to the secondary, and then to the tertiary sector. But the trend now is to work for faster growth through the tertiary sector, bypassing the all-important manufacturing sector. For a country that embarks upon economic reforms, it is also imperative to put in place adequate institutional support, by way of social policy, so that the transitory process triggered by a smaller role for the state as employment provider does not affect the well-being of its workforce.

The report, “Combating Poverty and Inequality: Structural Change, Social Policy and Politics,” makes it clear that many countries are not doing enough to create productive employment during the structural adjustment process. The message is that the current approaches to eliminating poverty are unlikely to deliver results as they emphasise macro-stabilisation. For instance, the insistence on fiscal discipline relegates social concerns to the level of by-products of policymaking. Specifically, in pursuit of fiscal prudence, governments in many developing countries place less emphasis on universalising social protection, and go for targeted measures, which suffer from a serious shortfall — it relates to the state's capacity to ensure full coverage of the target group. Moreover, macro-stabilisation policies mean a shrinking public sector and increasing reliance on market forces. The situation warrants a transitory process that emphasises employment-growth, accompanied by active state-backed social policies. For instance, the manner in which the East Asian economies managed their structural change — with an emphasis on the manufacturing sector, backed by social structures — proved effective in achieving higher growth while narrowing inequalities. The over-arching message from the report, which is important at a time when the global targets for poverty reduction appear elusive, is this: poverty and inequality are too serious issues to be left to the markets.

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